Excerpts from the book
The Economic Naturalist: In Search of Explanations for Everyday Enigmas*
by Robert Frank, Henrietta Johnson Louis Professor of Management and Professor of Economics at the Johnson School
from the IntroductionWhy do keypad buttons on drive-up cash machines have Braille dots? It's an interesting question, since the patrons of these machines are almost always drivers, none of whom are blind. According to my former student Bill Tjoa, ATM producers have to make keypads with Braille dots for their walk-up machines anyway, so it is cheaper to make all machines the same way. The alternative would be to hold two separate inventories and make sure each machine went to the right destination. If the Braille dots caused trouble for sighted users, the extra expense might be justified. But they do not.
Mr. Tjoa's question was the title of one of two short papers he submitted in response to the "economic naturalist" writing assignment in my introductory economics course. The specific assignment was "to use a principle, or principles, discussed in the course to pose and answer an interesting question about some pattern of events or behavior that you personally have observed."
"Your space limit," I wrote, "is 500 words. Many excellent papers are significantly shorter than that. Please do not lard your essay with complex terminology. Imagine yourself talking to a relative who has never had a course in economics. The best papers are ones that would be clearly intelligible to such a person, and typically these papers do not use any algebra or graphs."
Like Bill Tjoa's question about ATM keypads, the best ones entail an element of paradox. For example, my all-time favorite was submitted in 1997 by Jennifer Dulski, who asked, "Why do brides spend so much money - often many thousands of dollars - on wedding dresses that they will never wear again, while grooms often rent cheap tuxedos, even though they will have many future occasions that call for one?"
Dulski argued that because most brides wish to make a fashion statement on their wedding day, a rental company would have to carry a huge stock of distinctive gowns - perhaps forty or fifty in each size. Each garment would thus be rented only infrequently, perhaps just once every four or five years. The company would have to charge a rental fee greater than the purchase price of the garment just to cover its costs. And since buying it would be cheaper, no one would rent. In contrast, because grooms are willing to settle for a standard style, a rental company can serve this market with an inventory of only two or three tuxedos in each size. So each suit gets rented several times a year, enabling a rental fee that is only a fraction of its purchase price.
This book is a collection of the most interesting economic naturalist examples I have collected over the years. It is intended for people who, like Bill Tjoa and Jennifer Dulski, take pleasure in unraveling the mysteries of everyday human behavior. Although many consider economics an arcane and incomprehensible subject, its basic principles are simple and commonsensical. Seeing these principles at work in the context of concrete examples provides an opportunity to master them without effort.
from Chapter 2
Free Peanuts and Expensive Batteries: Supply and Demand in Action
Why do many bars charge patrons for water but give them peanuts for free?
Some bars charge their patrons as much as $4 for a half-liter bottle of water, while making sure that full bowls of free salted nuts are always within easy reach. Since nuts are more costly to produce than water, shouldn't it be the other way around?
The key to understanding this practice is to recognize that the terms on which bars offer both water and nuts are dictated by the effect of these commodities on demand for bars' core product, alcoholic beverages. Nuts and alcoholic beverages are complements. Someone who eats more nuts will demand more beer or mixed drinks. Since nuts are relatively cheap and each alcoholic drink generates a relatively high profit margin, making nuts freely available tends to increase bars' profits.
In contrast, water and alcoholic beverages are substitutes. The more water bar patrons drink, the fewer alcoholic beverages they will order. So even though water is relatively inexpensive, bars have an incentive to set a high price for it, thereby discouraging its consumption.
from Chapter 3
Why Equally Talented Workers Often Earn Different Salaries and Other Mysteries of the World of Work
Why do taxi drivers quit early on rainy days? (Linda Babcock, Colin Camerer, George Loewenstein, and Richard Thaler)
In most cities, it is possible to hail a taxi at a moment's notice when the weather is good. But when it's raining, people have a much harder time finding one. One obvious reason is that many people who walk short distances during good weather prefer to take a cab in the rain. So any given fleet of taxis will tend to be more fully occupied on rainy days. But the supply of available taxis is also smaller because taxi drivers work shorter hours when it rains. Why?
According to a recent survey, the reason is that many taxi drivers work only as long as it takes to reach a targeted income each day. On sunny days, they must spend much of their day cruising for fares, so it takes longer to reach the target. They can reach the same target more quickly when it's raining, because cabs tend to be full most of the time.
That taxi drivers knock off earlier is precisely the opposite of what their economic incentives might seem to favor. After all, the opportunity cost of quitting an hour sooner is much lower on sunny days than on rainy days. If their goals were to reach a target level of income over a longer period - say, one month - by working the smallest possible number of hours, cab drivers should work as many hours as possible on rainy days and take more time off on sunny days.
from Chapter 5
Why Smart for One is Sometimes Dumb for All:
Arms Races and the Tragedy of the Commons
Why does the practice of check splitting cause people to spend more at restaurants?
Friends who dine together at restaurants commonly split the check evenly. This practice is easier for the service staff than preparing a separate check for each diner. It is also easier than trying to keep track of who ordered what and adjusting everyone's contribution accordingly. Still, many find the practice objectionable because those who order inexpensively are forced to pay more than the actual cost of what they ate and drank. But there is another objectionable consequence of check splitting: it gives everyone an incentive to spend more than if they were paying separately. Why does check splitting have this effect?
Consider a group of ten friends who have agreed in advance to split their restaurant check equally. And suppose a member of the group has narrowed his choices to the regular serving of prime rib of beef, with a menu price of $20, and the large portion for $30.00. Assume further that the large portion is worth $5 more to him than the smaller one. If he were eating by himself, he would order the regular serving because the $5 of additional benefit from the large portion is less than its $10 extra cost. But because the group has agreed to split the check evenly, ordering the larger portion will make his share of the total bill go up by only $1 (his one-tenth share of the extra $10 for the larger portion). And since the larger portion is worth $5 extra to him, he will order it.
Economists call such decisions inefficient because the $4 net gain to the person from ordering the larger portion (the additional $5 by which he values that portion minus the $1 extra he ends up having to contribute) is smaller than the net loss imposed on the rest of the group (the $9 increase in the total amount they pay because their friend ordered the large portion).
Although check splitting can be both unfair and inefficient, the practice is unlikely to disappear. The losses involved are usually small, and after all, the practice does make the transaction more convenient.
from Chapter 6
The Myth of OwnershipWhy did Native Americans living in the Pacific Northwest define and enforce private property rights in land, while those living on the Great Plains did not?
The most important economic resources for Native Americans living on the Great Plains were the herds of wild buffalo that inhabited the region. Because buffalo congregate in large groups that roam for hundreds of miles, enforcing private rights to buffalo grazing land would have meant partitioning the Great Plains and building thousands of miles of costly fencing. Because the herds were so large relative to the number of animals that hunters killed each year, the benefit of enforcing such rights did not justify the costs.
In contrast, Native Americans living in the Northwest Territories earned their living primarily by trapping small animals for meat and fur. These animals typically did not roam over great distances but spent their entire lives on small parcels of land. Defining property rights to the land that individual Native American families lived on was tantamount to conferring trapping rights to the specific animals that inhabited those same parcels. The cost-benefit principle thus suggests a parsimonious explanation for why the two groups of Native Americans followed such a different approach to property rights.
*Copyright � 2007. Reprinted by arrangement with Basic Books, a member of the Perseus Books Group (www.perseusbooks.com). All rights reserved.